Zycher Statement Senate EPW Climate Bank
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Statement Submitted for the Record Subcommittee on Clean Air, Climate, and Nuclear Safety Committee on Environment and Public Works U.S. Senate Hearing on S. 283: “National Climate Bank Act” April 27, 2021 A National Climate Bank, Congressional Accountability, and the Wasteful Use of Economic Resources A National Climate Bank Would Prove Costly, Perverse in Terms of U.S. Political Institutions, and Would Advance No Useful Purpose Benjamin Zycher Resident Scholar, American Enterprise Institute Summary This Statement Submitted for the Record offers a critical review of legislation proposed in the 117th Congress, 1st Session, as S. 283, The National Climate Bank Act (hereafter NCBA), the subject of a hearing scheduled for April 27, 2021 before the Subcommittee on Clean Air, Climate, and Nuclear Safety of the Committee on Environment and Public Works. A summary of the arguments presented below is as follows: • A National Climate Bank cannot increase the capital resources available to the U.S. economy or to the federal government, and the true economic cost of the outlays envisioned to be made by the National Climate Bank would be almost double the notional budget. • The “climate” projects envisioned for the National Climate Bank would be highly inefficient regardless of the assumptions made about climate phenomena and the current and prospective effects of greenhouse gas emissions. This is because the envisioned projects would yield future climate impacts either trivial or undetectable. This explains the failure of the proposed legislation to specify a requirement or to offer a projection of reductions in GHG emissions attendant upon the projects to be funded by the National The American Enterprise Institute (AEI) is a nonpartisan, nonprofit, 501(c)(3) educational organization and does not take institutional positions on any issues. The views expressed in this testimony are those of the author. 2 Climate Bank. • The “Findings” in the proposed legislation on current climate phenomena are not supported by the evidence. • The “Findings” in the proposed legislation on future climate phenomena are based upon Representative Concentration Pathway 8.5, an extreme scenario of future atmospheric concentrations of greenhouse gases virtually impossible. • Because the proponents of the National Climate Bank have based their analytic arguments in substantial part upon the findings and policy proposals presented by the Intergovernmental Panel on Climate Change in its Special Report “Global Warming of 1.5°C,” they implicitly are endorsing a gasoline tax of $28 per gallon by 2030. • The obvious underlying purpose of the National Climate Bank is a shift of political responsibility for the inevitable financial losses to be incurred from the Congressional proponents of the legislation to the administrators of the National Climate Bank. Such a shift is inconsistent with the basic constitutional structure of American governance, and thus with essential accountability inherent in our political institutions. • The actual results of a National Climate Bank would be substantial resource waste, a less- productive capital stock, lower wages, and an increase in the politicization of economic activity. Discussion This Statement Submitted for the Record offers a critical review of legislation proposed in the 117th Congress, 1st Session, as S. 283, The National Climate Bank Act (hereafter NCBA), the subject of a hearing scheduled for April 27, 2021 before the Subcommittee on Clean Air, Climate, and Nuclear Safety of the Committee on Environment and Public Works.1 The NCBA would establish a National Climate Bank (hereafter NCB) to be capitalized at $100 billion over six years, all of which would be funded directly by the U.S. Treasury. The first $50 billion would be funded immediately upon creation of the NCB, that is, upon enactment by Congress and approval by the president. In general, the NCB would fund projects and technologies intended to reduce emissions of greenhouse gases (GHG): The purpose of the Bank is to make the United States a world leader in combating the causes and effects of climate change and reducing emissions in the United States for every dollar spent by the Bank, through the rapid deployment of mature technologies and the commercialization and scaling of new technologies…2 Several observations are as follows. 1 The proposed legislation can be viewed at https://trackbill.com/bill/us-congress-senate-bill-283-national-climate- bank-act/2021738/. The hearing announcement is at https://www.epw.senate.gov/public/index.cfm/2021/4/legislative-hearing-on-s-283-national-climate-bank-act. 2 See the proposed legislation at page 9, “Sec. 5245C. Purpose” at https://trackbill.com/bill/us-congress-senate-bill- 283-national-climate-bank-act/2021738/. 3 Capital resources and economic costs. The NCBA cannot increase the aggregate capital resources available to the U.S. economy or to the federal government, the latter of which in the end must obtain resources from the private sector. Instead, the NCBA by necessity must shift capital resources from other activities to the climate/GHG emissions activities envisioned in the legislation. But no such recognition of the (opportunity) costs of the activities to be financed by the NCB appears in the findings or other provisions of the proposed legislation. Instead, section 5245 (“Findings”) presents a series of assertions about the ongoing and prospective effects of increasing atmospheric concentrations of GHG; and the legislation implicitly assumes nontrivial future effects of reductions in GHG emissions attendant upon the projects to be funded by the NCB. Both the assertions and the future climate effects of NCB projects are addressed below. Note, however, that the NCBA fails actually to require or even to provide a projection of such reductions in GHG emissions. As discussed more fully below, the obvious reason for this omission is that any such specification would allow for a computation of the future climate impacts of the NCB investments, which would be trivial or undetectable. Instead, the NCBA requires only that the NCB provide a report to Congress describing the emissions reductions achieved or demonstrated, a highly elastic computation likely to prove far less meaningful than the sponsors of the NCBA seem to envision. The NCBA does not require reductions in other federal outlays as a financing mechanism for the NCB, and it is virtually impossible that the Congressional bargaining process leading to enactment of the NCBA would engender such a shift in spending. Accordingly, the funding for the NCB, both during and after the initial six-year period, will have to be financed with taxes, whether imposed immediately or---far more likely---in the future to service and retire the debt to be issued to acquire the requisite resources. It is well known that taxes induce shifts in economic behavior, as such taxation changes relative prices in the private sector and lead market participants to change their consumption and production decisions in response to those relative price shifts; such resource reallocation is driven by efforts to avoid the (increased) taxation whether in whole or in part. Because such allocational shifts are artificial responses to government policies, they must reduce economic output on net, that is, the private sector shrinks by more than a dollar when it is required to send a dollar of tax revenue to the government. That is the “excess burden” of taxation: the inefficiency effect of taxation.3 Recent estimates in the literature suggest that this excess burden is as high as 75 percent of the revenues collected explicitly; that is, the economic cost of a dollar of tax revenue is as high as $1.75.4 Such resource use would be highly inefficient. That a NCB ostensibly is needed to fund technological development and implementation of projects yielding (asserted) reductions in GHG emissions demonstrates that such investments in technologies and capital cannot satisfy a market test, and thus are wasteful by definition. This is true even if GHG emissions have or will create a significant negative externality: Because the NCB spending will yield effects on future climate 3 This assumes away the case in which taxes are imposed directly upon those demanding public services in proportion to the respective demands. The argument that the future taxes to be imposed to pay for the activities of the NCB will reflect the demands of those bearing those taxes for reductions in GHG is not plausible. See, e.g., James M. Buchanan, Public Finance In Democratic Process: Fiscal Institutions and Individual Choice, Chapel Hill: University of North Carolina Press, 1967. 4 For a useful summary discussion, see James R. Hines Jr., “Excess Burden of Taxation,” University of Michigan Office of Tax Policy Research, Product Number WP 2007-1, May 31, 2007, at https://www.bus.umich.edu/OTPR/WP2007-1.pdf. 4 phenomena either trivial or undetectable, such resource use cannot pass a plausible benefit/cost test. Let us apply the Environmental Protection Agency climate model, under the highest climate sensitivity assumption reported by the Intergovernmental Panel on Climate Change in its fifth assessment report.5 Immediate achievement of net-zero U.S. GHG emissions would yield a reduction in global temperatures of 0.173 degrees C by 2100. That effect would be barely detectable given the standard deviation (about 0.11 degrees C) of the surface temperature record.6 Net-zero emissions by the entire European Union: 0.113 degrees C. The